How will the SEC's lawsuit against Coinbase and Binance change the crypto industry?

Once upon a time, in the bustling world of cryptocurrency, two giants have always dominated: Binance and Coinbase . Their platforms enable millions of people around the world to trade digital currencies, and their influence covers the entire crypto market. However, as their power grows, the scrutiny they face also increases.

In early June 2023, the U.S. Securities and Exchange Commission ( SEC ), a powerful force in the financial world, turned its attention to the two cryptocurrency giants. The SEC filed a lawsuit against Coinbase and Binance, alleging that they violated regulations requiring them to register as exchanges and be regulated by federal agencies. More specifically, the SEC accused Coinbase of trading at least 13 crypto assets that were actually securities and should have been registered with regulators before being issued. These assets include well-known tokens such as Solana, Cardano, and Polygon. The basis of these charges is that because Coinbase makes these tokens tradable, the SEC alleges that they are securities, so the company should register as an exchange, brokerage firm, and clearing agency.

The lawsuit is the culmination of a two-year effort by SEC Chairman Gary Gensler to shift his agency’s enforcement strategy in the cryptocurrency space away from issuers of individual tokens and toward online platforms that trade those assets. Companies like Coinbase enable customers to transfer dollars from their bank accounts to buy or sell cryptocurrencies, a stark contrast to the days when would-be traders had to use message boards or similar clunky forums to find each other, agree on a price and hope their counterparties were honest.

Gensler warned that crypto exchanges need to register with the SEC. Such companies handle some functions that stock exchanges cannot, including holding customer assets and clearing trades. His solution is for crypto exchanges to separate their order execution, brokerage and clearing functions, a structure that would better reflect the way Wall Street works, with stock exchanges, brokers and clearing firms operating as independent businesses that follow rules tailored to their operations and risks.

Cryptocurrency exchanges have resisted Gensler’s demands that they remake themselves in Wall Street’s image. They have also said many tokens are not securities and that token developers cannot provide financial disclosures like public companies. That has not convinced Gensler or his enforcement staff. “Without proper disclosure, the public can’t answer the question of whether this is a scam or something else,” Gensler said on CNBC’s “Squawk Box” on Tuesday.

The impact of the SEC's charges was immediate. Coinbase's stock price fell 17% in early trading, and the shock reverberated through the crypto market. Binance also felt the sting, and the SEC sent a clear signal: the era of unregulated cryptocurrency trading is coming to an end. Crypto exchanges began to review their practices, hoping to avoid the fate of Binance and Coinbase. For ordinary investors, the charges triggered a wave of anxiety. The future of cryptocurrencies, once seen as the new frontier of financial freedom, now seems uncertain. Many worry whether the next Bitcoin bull run will still come, and increased regulation may cast a shadow on the industry's future growth.

Facing increasing regulatory pressure, Coinbase has launched a series of legal and public relations campaigns, telling lawmakers that the SEC is playing power games with a new technology that doesn't fit its rules. Some Republican House members have expressed sympathy for Coinbase's concerns, and Coinbase Chief Legal Officer Paul Grewal plans to testify Tuesday before the House Agriculture Committee, which has been considering whether some crypto assets should be considered commodities rather than securities.

However, amid this turmoil, some voices within the industry have expressed cautious optimism. Aaron Kaplan, co-CEO and co-founder of Prometheum Inc., sees the SEC's action as a meaningful step toward a regulated market infrastructure for cryptocurrencies, and told Coindesk that he believes it will ultimately help the industry move forward. He expects the competitive landscape to be different, but this will be a net benefit to American investors and should allow innovation to flourish.

Others, like Banxa US CEO and Chief Legal Officer Richard Mico, point to the negative impact of the continued lack of regulatory clarity. In an interview with Coindesk , he warned that the current situation could drive digital asset businesses out of the United States and toward friendlier jurisdictions, potentially depriving the United States of jobs and innovation.

Dan Raju, CEO of fintech company Tradier , told Blockworks that greater and clearer regulation of cryptocurrencies by the SEC is imminent. He believes that while these changes may affect cryptocurrency prices in the short term, they will create conditions for retail confidence in cryptocurrencies in the long term.

Despite the challenges, these industry insiders expressed confidence in the cryptocurrency industry’s resilience and potential for innovation. Their views reflect a cautious optimism, a belief that the industry can adapt and evolve despite regulatory hurdles.

However, not all views were positive. Kristin Smith of the Blockchain Association was unhappy with the SEC’s latest attack, noting that the regulator doesn’t “make the law — it just makes the accusation.”

The future of cryptocurrency remains uncertain as the industry deals with the fallout from the SEC’s charges. However, one thing is certain: the next few years will be a defining period for the cryptocurrency industry, and the world will be watching closely.